2012 Pension Reforms: Six steps to compliance

Employers need to identify the exact staging date on which their organisation will be required to auto-enrol all employees into a qualifying occupational pension scheme or the national employment savings trust (Nest).

Employers should carry out strategic and budgetary analysis of their existing pensions provision as early as possible to determine the size of the task and costs facing them.

Introducing a new pensions arrangement or changing systems can be a lengthy process.

The Pensions Regulator will remind employers 12 and three months before their staging date when they must comply with the legislation.

The optimum time for communicating the changes to employees is no more than a year before an employer’s staging date.

It is time for all employers to prepare themselves for the arrival of auto-enrolment, says Debbie Lovewell

Rarely has the boy scouts’ motto ‘Be prepared’ been more relevant to reward and benefits professionals. In October, the government confirmed it will go ahead with pensions auto-enrolment and the introduction of the national employment savings trust (Nest), following the completion of the Department of Work and Pensions’ review Making auto-enrolment work.

The timing of this clarification means the very largest employers, with 120,000 or more employees, now have less than two years to comply with the new legislation. While some will already comply, others face a lengthy and complex task. Iain Chadwick, senior consultant at Johnson Fleming, says: “It always feels like 2012 is a long way off, but we rarely see changes [to pension arrangements] taking less than 12 months.”

Step 1: Staging dates

Employers’ first task is to identify the staging date from which they will be required to auto-enrol all staff into a qualifying workplace pension scheme or Nest – the government’s low-cost alternative scheme.

Employers with 120,000 employees or more must auto-enrol them from October 2012, but can do so from July 2012 if they wish. The requirement will then be phased in for all organisations according to workforce size until September 2016 (see timeline below).

Employers also have the option of moving their staging date forward. John Lawson, head of pension policy at Standard Life, says: “Some large employers were fearing they would have to go through a massive enrolment period just before Christmas. For retailers, that would be a nightmare. In November 2012, employers with 50,000 to 120,000 employees will come in. In January 2013, [workforces of] between 30,000 and 50,000 employees [will do], so that is going to catch a lot of the big high-street retailers. If they employ a lot of staff around Christmas and have got their busiest time of the year, their HR department is already snowed under dealing with all those extra people, so how would they cope with auto-enrolment?”

Step 2: Existing schemes

Once employers have identified their staging date, they should begin to look at their existing pensions provision to assess the task ahead of them. Key issues to consider at this stage include whether any existing pension scheme on offer will meet qualifying scheme criteria, how many employees are currently enrolled in the scheme, and existing employer and employee contribution levels. Richard Wilson, senior policy adviser at the National Association of Pension Funds (NAPF), says: “Another thing [employers] need to do is some analysis of their workforce and try to work out how many eligible jobholders they have. How many people will they have to auto-enrol who are in the relevant age band and earn over £7,000 a year? They can start to work out what the impact might be.

“Then there are the plans they have to make once they have worked that out, like what kind of pension schemes are they going to have? If they have an existing one, will they extend that to everyone? Are they going to have tiers of pensions? Will they use Nest for a certain proportion of the workforce or for everyone? Or are they going to set up a new scheme with a pension provider? Setting up a pension scheme can take a long time.”

Step 3: Analyse costs

This analysis will give employers an idea of the potential cost increases they can expect. Standard Life’s Lawson says: “Typically, across defined contribution [pension schemes], only 55 out of 100 employees that are offered a pension actually take it up. When we auto-enrol people, that number will probably go up to 75% or 80%.

Employers have to plan for that cost increase because they have to put in a contribution for staff. So they should be thinking today about how to structure their scheme, what the contributions look like, how they are going to bring extra workers in, how they are going to manage that financial pain over the next few years. It is a difficult environment at the moment, with a lot of doubt for employers.”

In theory, the more work an employer has to do ahead of their staging date, the earlier they should start. “There are employers that already have high take-up rates, so they are not going to face any cost increase,” adds Lawson.

“Also, their contribution rates are above the required minimum, so they will have to do virtually nothing other than communicate to employees that they are going to be auto-enrolled and auto-re-enrolled every three years once the staging date hits. These are not the norm, though, so most employers will have to do something.”

Step 4: Set a timetable

Even if employers do not have to comply with auto-enrolment legislation until one of the later staging dates in 2014 or 2015, carrying out this analysis as early as possible will help them plan for, and absorb, any potential cost increases over a much longer period, lessening the impact for the organisation.

How long employers should allow for this analysis depends on whether they do it in-house or use a third-party provider or adviser. Alasdair Buchanan, group head of communications at Scottish Life, says: “The timescale for that [analysis] is a minimum of 12 to 18 months ahead of the staging date. If employers have someone doing it in-house, they will need to push that back further.”

However, some employers may feel unable to start work on preparing for the reforms at such an early stage because of more pressing financial concerns. Steve Herbert, head of benefits strategy at Jelf Employee Benefits, says: “Employers need to be doing something now, particularly if they are going to end up with a significant increase in numbers because that will be a significant increase in costs. No one knew in 2006 [when the reforms were first proposed] that the economy was going to go pop two years later. But now is absolutely dreadful timing for this to be happening, so forewarned is forearmed. Do something now. At the very minimum, alert your finance people to it, otherwise it will come back on HR.”

So, preparing for cost increases as early as possible may help to lessen the burden for both employers and employees. Alternatively, employers could examine their approach to total remuneration to identify areas where cash could be redirected into higher pension contributions. Darren Laverty, partner at Secondsight, says: “Some organisations may be in a position to start giving pay rises again, so they need to look at that because it may be possible to divert some of it into pensions.”

Step 5: Administration

As well as early budgetary and strategic planning, employers should also ensure their pension administration systems will be able to cope. John Foster, benefits consultant at Aon Hewitt, says: “The critical issue is to do with systems and payroll, so if there is a project plan taking shape, 20 months in terms of a systems change is not long at all. [Employers should be] making sure the system they operate can cope with contributions being deducted from pay. It needs to be set up in such a way that when the employee becomes eligible [for auto-enrolment and compulsory contributions], the payroll process is set up to identify it. A lot of payroll providers are only just coming to grips with this. It has previously been seen as a pensions issue.”

Any major or contractual changes to an organisation’s pension arrangements may require consultation with staff, which employers must build into their compliance schedule. Legally, they are required to consult with employees on such matters for 90 days.

Step 6: Communication

When planning for the reforms, employers must also build in time for communicating with employees. Aon Hewitt’s Foster says: “[Employers] are probably talking about six months of communications and consultation [with employees].”

As a rule of thumb, a good time to begin communicating the changes to staff in detail is about a year before an organisation reaches its staging date. Johnson Fleming’s Chadwick says: “Giving information too early can be counter-productive. People need enough time to consider it and make an informed choice, but giving information now about something employers are doing in 2012 [and beyond] is too early. It creates questions for which answers are not available.”

Employers should also factor in sufficient time to design and write communications materials. They may have a number of employees who have not belonged to a pension scheme before, so must ensure communications are easily understood by all employees. This will make it more likely that staff will understand the benefits of the changes and boost employee engagement.

Simon Butler, proposition development manager at Friends Provident, says: “Start thinking about communication seriously about nine months before you go into auto-enrolment. Because with pension communication, people can write this stuff quite quickly, but need to make it so it is properly understood and can engage with members without being patronising.

“It must be quite punchy and readily understandable by everyone. Get to a stage where you write the first piece of communication, then take it apart, put it into clear English, and make sure you have tested that against some members.”

However, employers could communicate the fact that the reforms are coming at a much earlier stage in order to prepare staff, particularly because they may have seen details of the changes in the national media.

“Warming employees up to the idea that this is coming, given that it is a big change in government policy, is probably a good thing so it does not come as a surprise months before the staging date,” says Lawson. “I do not think that it needs to be excessive communication, just general awareness raising.”

Raising awareness of the changes at an early stage may also encourage some employees to enrol in the scheme before they are required to do so. This can help to ease the administrative burden on employers when they reach their staging date.